Skill India and Make In India: Making the most of India’s structural change

The best way forward would be to align “Skill India” and “Make-in-India” with a focus on our comparative advantage. A single-minded pursuit of increasing India’s manufacturing base might not yield the best results.

The April 2018 World Economic Outlook (WEO) by the International Monetary Fund (IMF) discusses the trends in manufacturing jobs and their implications. Chapter 3, by Bertrand Gruss and Natalija Novta, concludes that the decline in manufacturing jobs is not necessarily a cause of concern. The belief that a smaller manufacturing sector implies slower economic growth and a scarcity of well-paying jobs for low- and middle-skilled workers—therefore contributing to worsening inequality—might not hold true. The authors, in fact, provide evidence that the declining share of manufacturing jobs need not hurt growth or raise inequality, provided the right policies are in place.

The key takeaways from the chapter are the following:

* The decline in the share of the manufacturing sector in employment might not have an adverse impact on growth and income equality;

* Some services sub-sectors can match the productivity levels of manufacturing;

* Bypassing traditional industrialisation and shift of employment from the agriculture sector directly to the services sector need not hurt growth; and

* Policies should aim at enhancing productivity across sectors and make gains from productivity more inclusive. This is of extreme relevance to India given that there is concern about loss of jobs and, at the same time, there is a big push towards the Make-in-India initiative.

In India, like in many other developing economies, workers are shifting from agriculture to services, bypassing the manufacturing sector. Compared to the 1950s, the share of agriculture in India’s GDP has more than halved, and the share of industry and services has more than doubled. However, the share of agriculture in employment has not come down drastically, with the sector still accounting for almost 50% of overall employment. In the recent decades, the manufacturing sector, too, has been a laggard in capturing the share in employment and has lost it to the services sector.

This skewed labour and output distribution has implications for India’s labour productivity. Data by the Conference Board—the global business membership and research association—shows that while India’s labour productivity has improved by 70% over the last decade, the overall productivity levels still lag behind those of other developing Asian economies. The difference with the developed economies is even starker. For instance, the productivity levels in Germany and the US are 5.1 and 6.8 times of India, respectively. The pace of productivity growth, too, has stagnated.

Let’s now assume value added per worker as a measure of labour productivity. According to the RBI KLEMS database, the average growth in labour productivity at an aggregate level for India during the period 2011-12 to 2015-16 stood at 5.8%, as against 7.4% in the preceding five years. While Make-in-India is trying to focus on improving the country’s manufacturing base with a special focus on labour-intensive sectors, data shows that labour productivity growth fell during the 2011-12 to 2015-16 period across major manufacturing sectors, as compared to that in the preceding five years. In fact, in the last five years, the highest growth in labour employment was in rubber and plastic products, electrical and optical equipment, construction, and business services. Barring business services, the growth in labour productivity in the rest of the sectors has remained negative. This essentially means that India kept pushing employment in unproductive sectors. While the country is undergoing a structural transformation, the economy is not benefiting to the full extent.

Movement of labour from manufacturing and agricultural to services may not be a positive trend for India. In fact, movement to low-skill and low-income services such as security guards and hyperlocal delivery personnel will not benefit India in raising the income levels and labour productivity at an aggregate level in the long run. So, what can the country do to make the most of this structural change?

Bertrand Gruss and Natalija Novta mention that growth of high productivity sectors can be constrained by skill shortage. Skill development is very necessary and skill premium explains a major chunk of difference in income levels across workers than their sector of employment. As argued previously in the column “Despite all the hype, Budget 2018 was just another missed opportunity for the education sector”
(https://goo.gl/aBzMkK), the lack of education and skills will keep India from utilising its demographic dividend. Skill development will ensure employability of the labour force as well as contribute to the expansion of productive sectors of the economy.

If the productivity in the services sector is much higher, then there is a need to focus on increasing employment and output of high-skill and high-value services sub-sectors. Perhaps there is a need to re-look at the Make-in-India initiative and realign the focus on manufacturing as well as services. The Economic Survey 2014-15 also contemplated this. The survey had concluded that, like manufacturing, several of the services sub-sectors in India also exhibit high productivity and convergence—both domestic and international. The potential of these sectors to be inclusive will hinge upon skill development.

In addition, the government policy should focus on promoting productivity enhancement across all sectors through technology adoption and skill development. Promotion of a few sectors can aggravate income inequalities. The policy should focus on optimising allocation of resources within sectors as well as across sectors. The blurring of lines between manufacturing and services sectors further necessitates the need to focus on a broad range of sectors, rather than a few.

While there is a growing wave of protectionism across the globe, research has shown that increased trade and financial integration can help in faster convergence of sectors. Productivity growth in tradeable and globally integrated sectors is much higher and the gains from the same are more inclusive. In case of India, knowledge process outsourcing (KPO), IT and ITeS could be those services sub-sectors.
The best way forward would be to align “Skill India” and “Make-in-India” with a focus on our comparative advantage. As mentioned in the IMF WEO and the Economic Survey, a single-minded pursuit of increasing India’s manufacturing base might not yield the best results.